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The other day a friend sent me a clipping from the morning paper. My friend is a poet, whom I occasionally charge with deliberate obfuscation, and she was, she said, getting some of her own back. “What gives?” she asked, showing she can use ordinary speech when she wants to. “Who’s obfuscating now?”

The clipping she sent me read as follows: “Economists have become more pessimistic in recent days because the most recent batch of economic statistics, including yesterday’s strong employment report, suggests that the economy may be picking up steam and may overheat.” This was, of course, a run-of-the-mill news note of the sort we have all read many times, and I wondered why it was bothering my friend. I gave her a ring. “Surely your Webster or OED has all the words,” I remarked cuttingly, and only a couple of them have more than three syllables.”

“Yes,” she replied, “and many of my poems are made up of even shorter words. What I’d like to know is, what kinds of idiots are made pessimistic by an economy’s picking up steam? If it’s in danger of overheating, why not put more water in the boiler? I know you economists are even more devoted to metaphors than we poets are, but I thought you were all enamored of the one about a rising tide lifting all boats.”

“Don’t look at me,” I objected. “I’m not one of ‘you economists’. The pessimists of your clipping know that if business gets really good the Federal Reserve Board will get nervous about inflation and raise the interest rate, and that lowers the capitalized value of all stocks and bonds.”

“You mean, if I invest my royalties in a hundred-dollar bond that pays five dollars a year, and if the interest rate goes up to 10 percent, then my bond will be worth only fifty dollars?”

“Eureka!” she cried. “I’ve outdone Archimedes! There’s no way the stock market can go up.”

“Keep your shirt on,” I advised.

But she paid no attention. “If business is bad,” she said, “poor earnings will send stock prices down. And if business is good, higher interest rates will send the market down. Why hasn’t anyone discovered this before? If you sell short, you can’t lose. Please give me the name of a good discount broker. I sincerely want to be rich.”

It’s a shame that my friend is merely one of the unacknowledged legislators of the world. We could use some of her guileful questioning in high places, and particularly in regard to the received doctrine that high employment makes for high inflation. Practically all economists, businessmen, bankers, politicians, and journalists are united in endorsement of this doctrine. Their unanimity is very curious – first, because few, if any, other economics propositions command such universal assent; second, because it is among the most unequivocally dismal notions in all this dismal science; and third, because there is no evidence whatever to support it. I don’t mean that no evidence is offered; I mean that the evidence offered is false or irrelevant or both.

If the proposition weren’t so dismal, it wouldn’t be worth troubling about. But look at what it means: It assumes that inflation is the worst economic misfortune that could befall us, and it asserts that in order to avoid – or simply to control – inflation, we must prevent several million people from having jobs. Even if all these millions were fully qualified and fully motivated, given the inexorable working of the system, they would still be unemployable.

Let’s think about that for a minute. It is the practically unanimous opinion of everyone who talks about the subject that our system, of which we are told to be so proud, must condemn upwards of seven million people to lives of undeserved squalor, uselessness, and hopelessness. Of course, that adds up to fifteen or twenty million men, women, and children when you count their dependents.

If I believed that our system were inevitably, necessarily, and indeed systematically that cruel, I’d be on the barricades in a minute – and I like to think I would be joined by you and by most of those who thoughtlessly repeat the dismal doctrine. My God, they’re talking about fellow human beings!

I don’t believe our system has to be that cruel. It is that cruel, but it doesn’t have to be. We’re given to understand that right now, with inflation running at about 3-5 percent and unemployment at about 6-5 percent, things are perhaps actually a little better than can be expected. Certainly our leaders consider them so good that they seem able to congratulate themselves without embarrassment.

Well, consulting Economic Report of the President[1] I find that since World War II there have been thirty-four years in which unemployment was at a lower rate, twenty-one years with lower inflation, and no fewer than twenty years where both inflation and unemployment were lower. Not only that, but in the year of lowest unemployment, inflation was lower than in all except four of the forty-odd years in question. In the year of highest inflation, unemployment was higher than in seven of the years. These figures certainly do not support the doctrine.

That may be said to be the small picture. A bigger picture is presented by the runaway inflations of our time that are regularly flashed on the screen to scare us into doing something drastic about inflation now, before we all have to get wheelbarrows to carry our worthless money to market to buy a loaf of black bread.

Besides the Weimar Republic runaway, the prime examples are Hungary after World War II and Brazil recently. If the doctrine were sound, those countries would have had full employment and overheated economies to start their runaways. Exactly the contrary, though, was the case. Each one suffered from appalling unemployment, and Brazil still does, without in any way impeding or controlling the inflation. These examples do not support the doctrine, either.

To complete the empirical record, we may note that today, of all industrialized nations, Japan has the second lowest unemployment and the lowest inflation. In short, there is no relevant evidence reliably connecting high inflation and full employment. We have not, after all, ever had full employment except in wartime, when inflation of civilian prices is to be expected because civilian production is necessarily curtailed. On the other hand, we have many times had inflation in peacetime, and we have perversely tried to control it by raising the interest rate in order to curtail production.

My poet friend asked me why, if the unemployed had jobs, they couldn’t produce goods at least equal in value to their wages. I couldn’t think why. “Then there wouldn’t be more money chasing fewer goods, would there?” she asked. “So why isn’t full employment the cure for inflation?”

Well, why isn’t it?

The New Leader

[1] The basis for this post is the re-print in the book “Economics Can Be Bad For Your Health” and the author updated the data to use the 1994 Economic Report. The original was written in 1988. The points still hold.

The estimated expenditure is $3.34 billion over five years. That’s $668 million a year, which may seem like a lot of money to you, but works out to $20.62 – exactly twenty dollars and sixty-two cents – for every man, woman and child living in poverty in the United States of America.

Yes, I know that the plan isn’t intended to do anything about poverty, isn’t meant to help the working poor, isn’t supposed to shelter the homeless or nourish the ill-fed, has nothing to do with improving or expanding medical services. In fact, one of its charms for the radical Right is that it is expected to reduce expenditures for public housing, Food Stamps, Medicaid and Aid to Families with Dependent Children (AFDC). So let’s look at it this way: $668 million is 0.00015 – or 15 thousandths of 1 per cent-of the current GNP. Or this way: It’s about a third of the projected cost of the additional space shuttle they’re building.

I’m sorry, but I’ve overstated the case a bit, for the $3.34 billion includes a “workfare” provision that will cost $900 million. This is one feature of the bill insisted on by President Reagan and feverish-eyed Republicans like Senator Orrin G. Hatch of Utah. Everyone else, including more liberal (if they don’t mind my using the word) Republican governors who will have to administer it, apparently hopes to repeal the provision either because of its negative cost effectiveness or because of its meanness. If that $900 million is deducted from the total, we have $2.44 billion left, or $488 million a year for everything the bill promises to do. The summaries given the press naturally accent the positive. They emphasize that a real effort is going to be made to force fathers to share in the support of their offspring. No one (except the fathers) can object to that, especially since it may persuade some to stay home with their families and thus prove rewarding all around.

The summaries further emphasize education (not the same as workfare). You can’t object to that, either. We’ve heard about our illiteracy rate and our inability to do simple arithmetic and our ignorance of our government and of history. We know businessmen complain that they have to weary themselves with excessive interviews to find competent workers. And so on. It’s hard, therefore, to be against more education. It’s also hard to imagine that the puny budget will make much of a dent in the problem.

For my part, I become depressed when I hear vocational education touted as a panacea. We must train these people to be punctual, we are told, and to work diligently and not goof off. Does anyone suppose they don’t know all that? It’s no secret. They’ve heard it all before, but they haven’t seen much good come of it.

Few experiences can be more disillusioning and dispiriting than undergoing training for the kinds of jobs that don’t exist. Perhaps my long memory misleads me here, yet I recall the junior high school shop where I learned to solder Western Union splices and to thread separate black and white wires through clay pipes set in the joists and studs of a mocked-up house. I was astonished when, in the real world, I saw my first BX cable, and I remain skeptical of that sort of job training unless it is done on the job. I have had occasion to observe a couple of for-profit training schools in operation, too, and I really don’t think the answer is privatization.

The solution is jobs. We’ve seen the solution in action – but again my long memory probably misleads me, for hardly a man seems to be alive who remembers the famous days and years of the New Deal. Everyone else knows that the New Deal failed. It taxed and taxed, and spent and spent, and elected and elected, and still, in 1939, on the eve of World War II, the unemployment rate was 17.2 per cent.

As I have previously quoted Disraeli, there are lies, damned lies, and statistics; and I have yet to meet even a professor of economic history who is aware of how that 17.2 per cent lies. So I’ll tell you. It counts all the millions who worked for the CCC, NYA, WPA, and the rest of the so-called alphabet-soup agencies as unemployed. Now, the millions who worked for those agencies in fact worked and in fact produced goods for the common wealth, and were in fact paid for it. They built thousands of schools, libraries, post offices, hospitals, and dams; restored thousands of acres of forests; paved thousands of miles of highways and sidewalks; helped bring electricity to the farms; made a start on public housing; painted pictures; produced plays and concerts; published a set of state guidebooks that is still unequaled; and gave courses in every subject imaginable. If that was unemployment, we could stand a bit more of it. Nor would it be unbearable to have urban streets swept and suburban leaves raked.

Everyone knows, of course, that this was impossibly expensive and wasteful. Yes, the last budget of Herbert Hoover’s Presidency (fiscal year 1933) was only $2.8 billion in deficit. And what was the last prewar New Deal deficit? $3.1 billion; ten per cent larger. To be sure, $300 million was a lot more in those days than it is at present. But the point is that enabling millions of people to contribute to the common weal and to maintain their self-respect cost only 10 per cent more than doing nothing. Which approach was the really wasteful one? Moreover, our wartime experience demonstrates that the so-called First New Deal would have been a lot more successful if it had spent more, not less.

INSTEAD of the creative programs of the New Deal, the new scheme has its workfare, something Ronald Reagan wishes to be remembered for. He deserves to get his wish. The requirement is that by 1994, one parent in every two-parent family (an institution the bill is supposed to be encouraging) that receives benefits must be made to work at least 16 hours a week in what is grandly known as the Community Work Experience Program. What will they be paid for this work? Zero. Well, you know, beggars can’t be choosers.

Since this provision does not take effect until 1994, it is a fair guess that New York’s Democratic Senator Moynihan, among others, intends to try to repeal it after the Great Veto Threatener leaves the White House. This is a judgment call with which I beg to differ. It brings to mind Moynihan’s first attempt at welfare reform which came when he was Richard M. Nixon’s Domestic Affairs Adviser. The attempt was defeated by a combination of conservatives opposed to any form of welfare and liberals led by the late George Wiley of the National Welfare Rights Organization, who pointed out that the proposed benefits were lower than those then in effect.

I had the pleasure and privilege of knowing George Wiley, who was a wise and humorous and dedicated man. He was well aware of Voltaire‘s dictum that the best is the enemy of the good, and he understood perfectly the argument that the benefits could be improved once the law was in place. He simply doubted that the improvements would ever come. The record supports his judgment. Over the past several years, for example, AFDC payments have lost a good third of their value because of inflation. The Pentagon gets budget boosts on top of generous estimates of inflation, but I’ve not noticed any rush to rectify the AFDC situation. As for the workfare amendment, it has already, in this Democratic Senate, survived by a 41-54 vote an attempt to table (and so defeat) it.

Workfare should not be confused with what the sponsors of the Family Security Act consider its heart and sinews: JOBS (for Job Opportunities and Basic Skills. The republic would collapse without silly acronyms).The laudable aim of this program is to get people off the welfare rolls and into regular employment where they can be self-supporting and self-respecting. As I’ve said, I’m dubious about the training being offered. Anyway, after training the welfare recipients are supposed to get to work, and I don’t at all object to that. The regulations covering JOBS are moderately complicated, and some of them are not nice; but I want to talk about something more fundamental.

We are told that the unemployment rate has now fallen to 5.2 per cent. Everyone knows this figure is too low, but I’m not going to quarrel with it – at least not here and now. I’m merely going to note that currently received economic doctrine, taught in practically all colleges and universities in the land, and I am sure accepted as gospel by large majorities of both houses of Congress, holds that full employment actually means 6 per cent unemployment. If unemployment really falls any lower than that, the economy is expected to overheat, and we’ll have inflation. (I’m not aware that we have been without inflation since World War II, except for one year in President Harry S. Truman’s second term, and one year in President Dwight D. Eisenhower‘s; so let’s just say that we’ll have even more inflation.)

Indeed, the newspapers and the airways are full of ominous questions right now: Will the Federal Reserve Board raise the interest rate again to head inflation off at the pass? Will that send the stock market into a tizzy? Will it abort our slowly recovering foreign trade? Will it make it harder to reduce the deficit? Will it make the mortgage rate so high that home ownership becomes an impossible dream even for two-earner Yuppies? Anyone who believes that mainstream economists know what they’re talking about will answer all those questions in the affirmative.

Where does that leave us? It leaves us with a JOBS program that is a mirage or a hoax. Assuming we believe the unemployment figures, we already have too many people working for our own good. Even if the JOBS training program should succeed beyond all rational expectations, even if the trainees could then be successful in finding work that would not (one of the requirements) displace anyone already working, we would have to head them off at the pass. We couldn’t afford to have so few people unemployed.

I AM NOT making any of this up. If you have merely glanced at journalistic reports of the thoughts of our mainstream economists, you may think that when they talk about 6 per cent of the work force being unemployable, they are saying all those millions are too little educated, too stupid, too sick, or too pregnant. That’s not exactly what they mean. They do classify many people under those headings, but they mean something else as well. They are speaking of friction in the economy – that is, time lost while workers are between jobs. Again there’s misunderstanding (and some of the economists even misunderstand themselves), for they make it sound as though there are several million people out there whimsically flitting from job to welfare to another job for no good reason. No doubt some such free spirits exist, and they will always be good for Presidential anecdotes; but the real friction results from business coming and going. It’s known as free enterprise.

In 1987, something more than 60,000 corporations went bankrupt. Most of the bankruptcies were very small. Nevertheless, they totaled over $36 billion. That ain’t hay, and it accounts for a couple of million people thrown out of work.

Then there are all the “efficient” mergers, which are efficient because they fire people. There is all the seasonal unemployment – clerks and warehousemen let go after the Christmas rush, farm workers between seasons, people laid off in model changeovers. There are all the customers’ men dropped after a market crash, and all those who lose their jobs when business temporarily slows, and those whose jobs disappear when their companies relocate for tax reasons – or in search of cheaper labor.

The foregoing account for the 6 per cent friction in the economy. The friction is not the fault of the workers; it is the fault of the system and its ethics. And the system is not a fact of nature; it is our creation. We created it in the image of mainstream economics, and the result is not altogether pretty.

The thing about mainstream economics is that it starts with the price system as given. The price system is not simply what the stickers read in the supermarkets or how the bidding goes inthe grain pit in Chicago. It includes all prices, interest rates, rents – the works – and particularly and especially wage and salary scales. Mainstream economics assumes that the way the rewards of the economy are distributed is none of its business.

Our present price system will be relatively stable so long as there are 6 per cent unemployed or underemployed. This is not quite like Marx’ industrial reserve army, because the important point is that these people must be drastically under rewarded, whether they work or not, and that the next 10-15 per cent above them can’t be treated much better (the average income of the bottom quintile of our families is below the poverty level).

Under our present price system, anything substantial you do for those at the bottom has to cause inflation. Other things can cause inflation, too, but really helping the poor is sure to do so. The only noninflationary way of helping the poor entails fundamentally changing the price system, specifically and dramatically narrowing the chasm between rich and poor. For the past 15 years we have been passing by on the other side (see “The Golden Mean,” NL, November 2, 1987), and it will take a whole lot more than JOBS, as well as something a whole lot different, to change direction.

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GEORGE [H.W.] BUSH has the distinction of introducing the only tax issue into this fall’s Presidential campaign.

For anyone whose interest in government or economics goes beyond personalities, taxes are endlessly fascinating. The power to tax is the power to destroy – and also the power to create. It is a sign of the shallowness of our society that the eyes of so many people of all ages and both sexes glaze over when the subject comes up. It is a sign of the shallowness of Bush’s understanding – or the deviousness of his intentions – that he wants to upset one of the best features of the 1986 tax law, which treats capital gains as ordinary income. He wants to tax them at 15 per cent – the lowest rate since the grand Depression days of Herbert Hoover.

Taxation can serve one or both of two purposes: It can raise revenue to pay the costs of government, and it can encourage or discourage various activities. The Revolution was fought (in part) because the Stamp Tax did the former, the Civil War (in part) because the tariff did the latter. In 1767, John Dickinson wrote in the second of his Letters from a Farmer in Pennsylvaniathat before the Stamp Tax, taxes “were always imposed with design to restrain the commerce of one part that was injurious to another, and thus promote the general welfare. The raising of a revenue thereby was never intended.” In contast, in 1832, South Carolina passed its Ordinance of Secession that denounced the tariff because of “bounties to classes and individuals … at the expense of other classes and individuals,” and espoused the theory of taxation for revenue only.

A more general theory appears in Alexander Hamilton‘s classic Report on Manufactures (1791): “[T]he power to raise money is plenary[1] and indefinite, and the objects to which it may be appropriated are no less comprehensive than the payment of the public debt, and the providing for the common defense and general welfare.”

All three of these theories are involved in Bush’s tender concern for capital gains. Of the three, he has pushed most strongly the one dealing with revenue. In this he is supported by Treasury Department Research Paper No. 8801, “The Direct Revenue Effects of Capital Gains Taxation,“ which argues that a lower rate brings in higher revenues. There are opposing views, specifically those of the Joint Committee on Taxation and the Congressional Budget Office. And much private ink has been spilt on both sides.

On one level, the question is an extreme case of that raised by the Laffer Curve, and of Peter Peterson‘s claim that the rich pay more taxes when the rate is lower (see “In for a Penny, In for a Pound,” NL, June 13). The case is extreme because Bush’s proposal would cut the capital gains rate roughly in half, requiring capital gains “realizations” to double just to keep revenues running in the same place.

The latest figures the Treasury research paper gives us to work with are those of 1985, when the marginal rate was 20 per cent, capital gains realizations were about $169 billion, and the revenue raised was about $24 billion. Since 20 per cent of$169 billion would be almost $34 billion instead of $24 billion, it is obvious that the capital gains tax, even though admittedly mostly falling on the superrich, was paid by many whose Adjusted Gross Income was less than the $175,251 then needed to boost a married couple into the top bracket. Obviously, too, once the new tax law settles down and a married couple with an Adjusted Gross Income of $29,751 finds themselves in the top bracket (28 per cent), practically everyone with any capital gains will be paying the top rate.

Neither you nor I nor even George Bush knows what the future will bring. It is probable that realizations were up in 1986 and down in 1987. A large part of what was realized in 1986 (including everything I cashed in) was in anticipation of 1987’s higher rates, while a large part of what was realized in 1987 was losses in the stock market’s Oktoberfest (me, too). It is likely that realizations this year will be greater. No matter: For Bush’s scheme to work, they must more than double what they otherwise would be. The question I ask is: Do we want that to happen?

To answer that question we have to look at where capital gains come from. They come about in two ways: (1) a company retains and reinvests its income instead of paying it out in dividends, thus increasing its net worth and, presumably, the market value of its shares; or (2) goods (especially real estate and works of art) increase in value because of market shifts or inflation, thus tending to lock holders into property they might otherwise have wanted to sell. It is received doctrine that the first method should be encouraged, and that adverse personal consequences of the second should be mitigated; hence the special treatment of capital gains. In Britain, and generally on the Continent, they are not taxed at all, making George Bush more moderate than he may find congenial.

A company that reinvests its income grows. The more companies grow, the more the economy grows: more goods, more jobs, more profits. Assuming that for a given company expansion makes sense, the necessary capital can be raised by borrowing, by selling new shares of stock, or by retaining earnings. Interest payments on borrowings are a deductible business expense, while dividends on stock are not. On the other hand, interest payments are a fixed expense, while dividends, again, are not. Balancing the foregoing considerations, a fairly prudent and sanguine management will opt for borrowing, but a company that can satisfy its stockholders with capital gains will enjoy the best of both worlds by relying on its retained earnings.

In addition, it is said that the possibility of capital gains attracts both entrepreneurs and investors to new businesses, which are the economy’s hope for the future.

Since retained earnings are rarely enough to do the job for a rapidly growing concern, its real choice is between issuing new stock and shouldering new loans. There would be no problem at all if interest payments were not a deductible business expense. The 1986 tax law has partially eliminated it as a personal deduction. I’ve made the case for eliminating it for business, too (see, “A Tax Increase by Any Other Name,” NL, November 24, 1984[2]) and shall only outline it here. In brief, the deduction, although it seems to subsidize the borrower, in fact subsidizes the lender. Without the subsidy, interest rates would have to fall, because few could afford the raw rate.

Moreover, the subsidy is meaningful only to an already profitable company, given that a new enterprise typically operates at a loss for some time and can’t afford to borrow at all. It has no net income from which to deduct the interest expense, and therefore has to pay the usurious raw rate on whatever it borrows. In sum, if you want to encourage new enterprise, you will eliminate the deduction for interest expense and will consider the treatment of capital gains more important for personal than for business finance.

DOES IT, then, make sense to encourage individuals to seek capital gains twice as eagerly as they seek earned income? What is actually encouraged, of course, is wheeling and dealing. It is not impossible that some good enterprises are thus sponsored that would not have been undertaken otherwise; but it is quite certain that wheeling and dealing raises the cost of capital for all enterprises, new and old, good, bad and indifferent. It is also certain that, whatever the ills we have recently been suffering, they were not caused by a lack of wheeling and dealing.

Finally, it is urged that capital gains are, for most individuals, an unexpected and even unwanted consequence of inflation. The house you bought for $100,000 five years ago can be sold for $200,000 today, which is dandy. But you have to have some place to live, and an equivalent new place will cost an equivalent number of dollars, or $200,000. An ordinary tax on your capital gain (28 per cent under the new law) would leave you $28,000 poorer than you’d have been if you hadn’t moved. Bush would leave you $15,000 poorer, and that is better, but not great. (There are, to be sure, special ways to handle this special problem, and some of them are embodied in the present law.)

Any attempt to offset the general effects of inflation, however, winds up by encouraging it. Conservatives of Bush’s school colors are quick to see that wage increases tied to the cost of living are inflationary. The same is true of capital increases. As a matter of fact, capital increases are even more inflationary for reasons we’ve previously discussed (see “Vale, Volcker,” NL, June 1-15, 1987). The very possibility of capital gains stimulates the frenetic search for more of them; it’s easier than working.

Indeed, it is precisely this frenzy that Bush wants to stimulate. As the Treasury has told us, capital gains realizations in 1985 were $169 billion. On the same realizations, the present rate of 28 per cent would yield $47 billion, and Bush’s rate of 15 per cent would yield $25 billion. For Bush to bring in more revenues than the present rate, he would have to push realizations beyond $340 billion, or more than twice the highest they’ve ever been before.

Since 1966, capital gains realizations have steadily increased, from $31 billion ($67 billion in 1985 dollars) to the present. It happens that, as Professor Hyman P. Minsky points out in his recent book Stabilizing an Unstable Economy, since 1966 “the American economy has intermittently exhibited pervasive instability.” While not necessarily conclusive, the association of these facts is at least suggestive, especially when you remember that instability is another name for the volatility that comes with wheeling and dealing.

Bush deserves a good mark for daring to talk about taxes. But he has offered us another Trojan Horse to make the rich richer. Let’s suppose he succeeds and manages to boost capital gains realizations to $340 billion. Then the after-tax income from capital gains would leap to $289 billion-more than double that of any previous year. As we said in discussing Peter Peterson’s ideas of taxation, this is the way multimillionaires are made.

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THE SOCIAL SECURITY system is again in the news. Maybe “still” rather than “again.” A decade or so ago a radio chat-man named Ronald Reagan advocated making the system voluntary and throwing it to the private insurance companies. A few years later budget-cruncher David Stockman scared us into thinking bankruptcy was imminent. A few months ago Peter Peterson warned that it was promoting (or maybe he was promoting) an intergenerational war. Now Morgan Guaranty Trust writes its customers and Walt W. Rostow writes the New York Times and Daniel Patrick Moynihan writes his constituents to celebrate the burgeoning of the Social Security surplus and to propose things to do with it. And all the while candidates for high office solemnly reiterate that the system, although much changed in the past, cannot now or ever be changed again.

These various reactions are facilitated by the fact that Social Security is a horse designed by a committee. It is part employment tax, part endowment, part social welfare. The tax is fantastically regressive: Workers below the poverty level pay a geometrically higher share of their income than does Peter Peterson. The tax is also heavily anti employment and especially adverse to entry level employment. What to an employee is the minimum wage less 7.51 per cent, to the employer is the minimum wage plus 7.51 per cent. The endowment is creakingly antifeminist: A wife whose lifetime earnings were greater than her husband’s, provided both contributed the maximum, receives no greater benefits than if she had earned nothing and paid no taxes. The social welfare benefits are skewed in favor of the middle class: The poor are confirmed in their poverty.

Beyond the foregoing, the system is apparently too complicated to explain to anyone except, perhaps, another computer. For several years I have been trying to get someone to tell me how my benefits are calculated. I have applied either by mail or in person or both to six Social Security offices (Peekskill, Mt.

Vernon, White Plains, and Lake Success, New York; Atlanta, Georgia; and Sarasota, Florida), to four congressmen (Richard L. Ottinger and Joseph J. Diogardi of New York, Connie Mack III of Florida, and a committee chairman whose name I forget), and to the author of a reputedly authoritative book (ProfessorWalter D. Coles, who asked me for information, which I supplied, but was evidently unable to return the favor). None of them knew how the calculations are made, and none was able to find out.

If after a hard-seat wait of an hour or two you get to talk to someone in a Social Security office, you’ll be offered a nicely printed table showing what your benefits will be should you retire tomorrow. Although no one will be able to tell you how the table was constructed, at least you’ll have something to compare your benefit checks with. Apparently I am special, starting with the date of birth and ending with my date of retirement, for no one knows what to do about me. Since my benefits have twice been “corrected” without explanation, I find it hard to trust that the system is always accurate.

Trust is crucial for civilized society, but the Social Security Trust Fund is misnamed, and not merely because of its surrounding cocoon of secrecy. In a rational society, Social Security would not pay different amounts to different people, would not be supported by a separate tax, and would not be funded. It would treat all citizens equally, would be supported out of the general revenues, and (given that the “risk” is level over a fairly long term, and therefore is predictable) would be treated as a current expense.

The Social Security law was not passed by a quite rational society, however. We had what James MacGregor Burns analyzed as a four-party system: Presidential Democrats vs. Congressional Democrats vs. Congressional Republicans vs. Presidential Republicans.

That “Deadlock of Democracy,” as Burns called it, produced the Social Security Trust Fund. Liberals wanted it because they feared that whenever conservatives got control of the government, benefits would be cut or eliminated. Conservatives wanted it because the payroll tax that supports it is far more regressive than the income tax. The liberal mistrust continues unabated. The conservative mistrust has grown as the fund has grown; the dread is that liberals will find a way of using it for the public good.

Morgan Guaranty Trust Company has a way to allay the dread: partial privatization. Workers would be allowed to divert about a fourth of their Social Security taxes into something very like the IRAs that were once going to make us all rich. The diversion would “boost the United States net saving and investment rates, perhaps to as much as 8 per cent of GNP.” In full bloom, the scheme would give bankers and brokers close to $200 billion a year to play with. That sure sounds like fun, and it is poetically proper that the proposal should come from a firm bearing the hallowed name of Morgan. The elder J. P. Morgan was the central figure in Louis D. Brandeis‘ Other People’s Money(see “Junk Bonds and Watered Stock,” NL, March 24, 1986), yet even he was not so clever as to get the government to collect other people’s money for him.

Walt Rostow’s notion is similar in that he wants the surplus invested in private enterprise; it is different in that he would have the government do the investing, via something akin to the ReconstructionFinance Corporation. Walt was widely admired on Wall Street for his position on Vietnam, but he won’t make friends down there with this idea. How can a plan be any good if it doesn’t provide bankers and brokers with commissions and underwriters’ fees?

Senator Pat Moynihan’s proposal is characteristically “realistic.” I put “realistic” in inverted commas because I don’t want you to think I consider it desirable or smart. The Senator ranks at the top for honesty, decency, candor, and a witty literary style. Alas, those rare and valuable qualities don’t guarantee the invariable soundness of his ideas.

He already takes credit for having seized on a suggestion of Senator Bob Dole‘s and organized with him a series of semisecret meetings involving Republican Congressman Barber Conable (now head of the World Bank), White House aide James Baker (now George Bush’s campaign manager), and the aforesaid David Stockman. Together they worked out the “reform” of 1983. I don’t suppose anyone would dare to insult any of Moynihan’s companions by calling him a liberal, and the outcome of their meetings was not liberal, for it entailed substantial hikes in Social Security taxes as well as some cuts in benefits.

Thus was Social Security saved from bankruptcy. Oddly enough, the Senator acknowledges that it was not really facing bankruptcy. The claim was merely another of Stockman’s imaginative ghost stories. And when the actually solvent system received a great influx of new tax money, the trust fund of course started to grow very rapidly. In his recent “Letter to New York,” the Senator estimates the current growth at “$109,440,000 a day and rising.” The total is now approaching $100 billion; it is expected to reach $1.4 trillion in the year 2000 and $4.5 trillion in 2010. I assume the Senator means current dollars, but still, Wow!

THE SENATOR has a more modest proposal than Morgan Guaranty for the fund. He would use it to de-privatize the public debt. As it is, Social Security has first claim on bonds the government issues. Sometime in the first decade of the 21st century it will have bought practically the whole debt. The Senator sees the result this way:

“As Social Security revenues come in, the Treasury, having ‘sold’ the bonds to the trust funds, need not sell them to the public-as for example the private pension funds-will buy bonds of private corporations. They have to put their money somewhere. This translates into an increase in savings.”

There are several other suggestions for the surplus. One would use it to bolster the hospital insurance part of Medicare, said to be in even worse shape than the Old Age, Survivors and Disability Insurance Fund was claimed to be. Another would use it to balance (or overbalance the budget, and thereby permit the rehabilitation of people, bridges or battleships, depending on your taste. A third would use it to reduce other taxes.

What all the foregoing schemes have in common is unquestioning acceptance of the Social Security tax (and scheduled increases) in its present form. This is mainstream conservative thinking, in accordance with the new law of political science I proposed four years ago (“New Choices and New Taxes,” NL, August 6, 1984[1]): “In any confrontation between neoconservatives and neoliberals, the neoconservatives will always win, because the neoliberals will allow the conservatives to keep whatever they have previously gained, regardless of when or how they gained it.”

Hardly anyone is giving a thought to the truth that the miraculous Social Security surplus is the consequence of an absurdly high and shockingly regressive tax imposed because of a blind panic induced by deliberately false information. Barry P. Bosworth, a senior fellow of the Brookings Institution, puts it succinctly: “We are not, in fact, saving the Social Security surplus; we are simply using a system of regressive wage taxes to finance general fund outlays that were formerly financed with the personal and corporate income taxes.” As the law now stands, Social Security has been transmuted into just another system for taking more from the poor in order to leave more for the rich.

It is unseemly for Senator Moynihan to be so proud of his part in the scam. If he really thinks that reducing the budget deficit and the national debt is the road to prosperity, he would be well advised to search for ways to make the rich contribute their share and not rest smugly content with a system that takes a far higher percentage of a day laborer’s wages than of the seven-figure salary of the CEO at the company that occasionally employs him – a system, moreover, that taxes you only if you work and not at all if your economic endeavors are limited to cashing your dividend checks and clipping your coupons.

The New Leader

[1] Editor’s note: The name of this article in print is “Bad Ideas from Brookings.” On occasion The New Leader changed the title from that submitted/suggested by the author. This is one case.

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IT LOOKS as though they’re going to try putting “circuit breakers” on the securities and futures markets. I’m not sure it will make much difference. The question, after all, is not whether stopping trading for an hour or so after a fall of 250 points would stop or accelerate the plunge. (It might very well do one thing one day and the opposite the next; there are plausible reasons either way.) No, the question is: What is the use of a market that can crash and lose 30 per cent of its value in a single hectic day, and that can routinely lose or gain 2-3 per cent in a couple of hours? What do we have securities markets for anyhow?

The reasons ordinarily advanced are two: (1) to provide financing for productive business and industry, and (2) to encourage people with a little money (or a lot) to participate in the financing. As to the first point, the New York Stock Exchange won’t even bother answering your letter if you ask them how much of their trading is in new securities issued to finance growing business. Probably they don’t know, and certainly they don’t care. As to the second point, today’s lament on Wall Street is that the small individual investor (that is, anyone having less than, say, $10 million to play with) has stayed, as the current metaphor has it, on the sidelines since the 1987 Crash. They’ve stayed out of the game, not for lack of coaches eager to send them in, but because of a prudent aversion to a playing field that sometimes resembles a mud slide.

In short, the pretended justification of the New York Stock Exchange is a sham – and the same goes for all the others, foreign and domestic. They do not in fact provide much financing for new enterprise; they do not in fact significantly facilitate individuals’ participation in such financing; and whatever they do could be easily and far less expensively organized otherwise. If there is no justification for the stock exchanges, there is certainly none for the futures exchanges that are based on them. Federal Reserve Board Chairman Alan Greenspan thinks these things are justified because people use them; the same argument can be made (and I’ve heard of some who have made it) in support of astrology.

Ironically, the exchanges’ own supporters make an air-tight case against them. Look, they say, the Crash didn’t hurt anyone, except for a few foolish widows and orphans. Milton Friedman understands us when he says, “Easy come, easy go.” Six months after the Crash, they say, the markets were about where they had been six months before it. The Great Reagan Recovery is jogging along as if nothing happened: GNP up about the same, inflation about the same, the deficit about the same. Lots of banks may be in trouble, but not because they were involved, directly or indirectly, in the market. A trillion dollars, more or less, disappeared overnight, they say, yet it was only paper profits anyhow. Now that the hysteria has subsided, you can see that the whole uproar didn’t make any real difference.

Since it didn’t make any real difference, they say, there’s no need to do anything. I say that since it didn’t make any difference, there would be no harm in trying to prevent a plunge from happening again, if only to protect the widows and orphans.

The Crash (the biggest ever) had no substantial effect on the producing economy because the damage had already been done. The trillion dollars was really lost and it is a lot of money almost as much as the Reagan increase in the public debt (or, to put it another way, almost as much as the Reagan tax cuts). The enormous loss didn’t matter to the producing economy only because the producing economy never had the use of it. The money went directly from the happy beneficiaries of the Kemp-Roth tax bill into Wall Street and then down the drain.

Of course, some of the tax cuts went into consumption, and some into government investment (bonds to pay for the deficit), and even some into private enterprise. On balance, though, it was the long bull market that started in 1982 that was created by the tax cuts. To be sure, there were other unfortunate things going on simultaneously (mainly former Fed Chairman Paul A. Volcker‘s love affair with double-digit interest rates); but if there had been no tax cuts, there would have been no bull market.

You can see why most people who lost money in the Crash (other than the few widows and orphans) have shrugged it off. What they lost was tax money. So they’re no worse off than they would have been if Ronald Reagan hadn’t been elected; and it sure was fun while it lasted. Yet these people are citizens, too.

They are not merely private atomistic profit maximizers and utility maximizers. As they complain to each other at bars and over bridge tables, they’re weighed down by their share of the public debt. Considering that upwards of 35 million people are living in poverty and that many millions more make so little they pay practically no income taxes, each family of the sort of citizens we’re talking about can actually claim liability for close to $100,000 of the public debt, and perhaps more. Besides, the pundits tell us the debt is to blame for all our troubles.

Thus if Milton Friedman was right when he said, “Easy come, easy go,” he was also right when he said, “There’s no such thing as a free lunch.” The excitement of the bull market and the titillation of the Crash were not free; they were paid for by doubling the public debt. If our tax system were fair, we might say that, in general, the people who had fun in the market are also the people who assume the debt burden, and therefore, again, the whole roller coaster didn’t make any difference.

Aside from fairness, the trouble with such a conclusion is that those tax dollars, like all dollars, come ultimately from the producing economy. No economy can run on securities alone, because stock certificates are not good to eat or wear; and while they’ve sometimes been used to paper walls, they don’t provide much shelter. Wealth is the result of the work of producing, for which people are paid in the form of wages, salaries, interest, rents or profit. The government, too, is a prolific and necessary producer, mainly of services, for which it is paid in the form of taxes.

The way conventional economics has it, as soon as people get paid for something, they buy something with their pay. The people they buy from do the same, and so on and on. Except for a little friction, this producing and buying and selling goes on steadily, to everyone’s benefit. The economic system is in perpetual motion, and also in perpetual equilibrium. There is really no way for anything to go seriously wrong.

Yes, so long as people are buying and selling goods and services- that is, trading in commodities. But when they are buying and selling claims on capital (in the stock markets), or money or options to buy or sell money or capital (in the futures markets), they are not dealing in commodities; they are speculating in the conditions that make commodities possible.

The money absorbed by the speculating economy is money earned by the producing economy that is no longer available to participate in the production of goods and services. The more money goes into speculating, the less is available for producing. Consequently fewer things are produced, and fewer people have jobs producing them. The conventional economists’ happy cycle of buying and selling is shrunk and bent out of shape and may be fractured. Since the speculating markets not only fail to assist the producing economy but actually hurt it, you might think it would make sense to go beyond regulating them and shut them down altogether.

IN HIS MOST informative new book, Markets: Who Plays, Who Risks, Who Gains, Who Loses, Martin Mayer shows repeatedly how the exchanges have been able to make a mockery of the relatively innocuous rules we tend to think are in force. The Federal Reserve Board, for example, is said to set the margin rate (that is, the amount you can borrow to buy stock) at 50 per cent. If you ask me, it ought to be zero; but it doesn’t matter, because only the littlest millionaires are affected, and all the really big operators have easy ways to get around it.

Given the radically reactionary interests now ruling the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, there is no real possibility of rational control of the speculators for years-or until the next crash. So why not consider abolition?

Naturally, there would be a great debate, or at least, a lot of talk. One of the points that would be made is that shutting down the exchanges would simply send them scuttling abroad. (The same threat will be made whenever rational control is proposed.) New York City is sadly aware that even trying to get the exchanges to carry their share of the tax load is immediately smothered by threats to move to the New Jersey meadows. The wonders of the computer age being what they are, it would not be much harder to set the whole thing up on Grand Cayman Island or Singapore.

Beyond the damage to our pride (equivalent to losing the Winter Olympics), would not the flight of the exchanges be accompanied by a flight of capital, and would not that be our ruin? It is said that the flight could not be prevented. Complete prevention would no doubt be impossible, just as perfect income tax collections are impossible; but perfect flight wouldn’t be possible, either. In any case, the fleeing capital would merely be money. It wouldn’t be factories or warehouses of goods for sale or goods in the process of consumption. And since the money that would flee isn’t doing anything in our producing economy, its loss wouldn’t change anything that matters.

There is, however, a much simpler and fairer way to control the markets. As we’ve said here before, speculative binges occur only because some people have more money than they know what to do with. When we had steeply progressive income taxes, there were many fewer such people (as well as many fewer living in poverty). The markets then were too viscous for wheeler dealers but certainly liquid enough for ordinary purposes. We could do worse than learn from our past success.

The New Leader

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LAST OCTOBER, just before the stock market crash, one Peter G. Peterson had an article in the Atlanticthat caused a lot of talk on commuter trains. Peterson was President Nixon’s Secretary of Commerce in 1972. He astutely left the Cabinet the following year, and since has been an investment banker as well as a tireless agitator in the press and on TV. He was as responsible as anyone for the 1983 boost in Social Security taxes and the partial tax on Social Security benefits. He continues to talk darkly about “entitlements,” to warn that universal medical care will be the death of us, and to plead for a tax on consumption.

After reading Peterson’s article, I started to do a column on what’s wrong with it, but it would have taken a year’s worth of this space. One sentence has nevertheless kept nagging at me. I quote: “We now know, for instance, that a maximum tax of 50 per cent actually generates more revenue from the wealthy than a maximum rate of 70 per cent, and provides real incentives for budding entrepreneurs.” This claim was in furtherance of the claim that it would be a mistake to ask the wealthy to pay for their share of the deficit. It calls to mind an Artemus Ward saying I have cited before: “It ain’t so much the things we don’t know that get us in trouble. It’s the things we know that ain’t so.”

By an aberration of my W. C. Fields like filing system, I can lay my hands on one, but only one, set of old tax instructions. We can make do, however; it’s the top bracket Peterson is talking about, so we’ll talk about that too. When we mention the incomes of the wealthy, we’ll mean just the part of their incomes that is taxed at the top rate-70 per cent or 50 per cent, as the case may be.

It will be convenient to have a standard of wealth. Peterson doesn’t give one, but let’s guess that to count as wealthy in his book, one has to have $200,000 in the top bracket.

We also need some ground rules. I’ll name two: (1) The differences we’re going to consider will not have anything to do with tax shelters, because Peterson speaks only about the tax rate, and anyhow shelters are greatly restricted by the new law; and (2) inflation won’t have anything to do with our calculations either. We want a level playing field, as the Wall Street Journal would say.

Now, as I read Peterson, he seems to be saying that if you take all the $200,000-and-up incomes as above defined, add them together, and tax them at 50 per cent, you will collect more taxes than you would if you taxed them at 70 per cent. That’s too preposterous for anyone to believe; surely Peterson must have meant something else. Let’s explore the possibilities, for he seems to think he’s hit upon a great social truth.

We’ll start with a little algebra. We will call x the amount taxed at 70 per cent, and y the amount taxed at 50 per cent. Then if taxes paid in the two years are equal, our equation would be .7Ox = .50y. Solving the equation for y, we have y = .70x/.50, or l.4x. In other words, the amount taxed at 50 per cent would have to be at least two-fifths greater than the amount taxed at 70 per cent.

The mathematics is unimpeachable, but perhaps Peterson is focusing on something different. Low rates are often said to take the incentive out of cheating on taxes. I’m no economic determinist, so I don’t hold with that. Indeed, in spite of recent studies funded by the IRS, I’ll stand right up and say that half of the wealthy taxpayers are honest. And why not? As the chorus sings in Iolanthe, “Hearts just as pure and fair/May beat in Belgrave Square/ As in the lowly air/Of Seven Dials.” Then for every honest wealthy taxpayer who reported an income of $200,000 in both years, there would have to have been a wealthy cheat whose income was really $360,000, who didn’t report $160,000 of it when the rate was 70 per cent, but who cheerfully reported it all when the rate fell. In that way, the wealthy as a class would report 1.4 times as much at the lower rate as at the higher, and the total taxes paid by them would remain the same.

Is Mr. Peterson telling us that many of the wealthy are dishonest? And if he believes that, does he believe the cheaters would suddenly become honest once the marginal rate dropped? Having spent even a year in Nixon’s Cabinet, he can’t believe that. To quote Iolanthe again: “In for a penny, in for a pound.”

Let’s try another approach. It has been said at least since the New Deal days that high taxes sap the incentive of producers to produce. After a certain point, they are supposed to get tired of working for Uncle Sam; so they quit working, or maybe take longer lunch hours. This is thought to be bad for everyone because these people are, by definition anyway, the most productive among us. We should try to get them working again by allowing them to hold on to more of what they get their hands on.

To keep a level playing field, we’ll consider only what is called earned income, for increased interest or dividends or rents would go also to remittance men, who know nothing of incentives since they do nothing anyhow. To be sure, our big- time producers are used to getting much of their income from stock options and such, but the 1986 law, by taxing capital gains as ordinary income, has largely eliminated that particular incentive.

Although the morals are slightly different, the mathematics of the incentive argument is the same as the mathematics of the cheating argument. So I ask: Does Peterson mean that our can-do people will increase their doings by 40 per cent just because the tax rate has been cut? Does he want us to believe that they’re doing whatever it is they do without half trying? Does he think it honorable of them to have done this (quoting Iolanthe yet again) “By taking a fee with a grin on [their] face/When [they] haven’t been there to attend to the case”? Or put it this way: If they lack incentive to do what they’re supposed to, why don’t they get out of the way and let someone else do it?

Well, I’ll make another guess at what Mr. Peterson meant. Maybe he’s saying the incentive of a lowered tax rate will boost thousands of people from the $150,000 class to the $200,000 class, which would now have more members and consequently a higher total income.

This explanation is more plausible than the others, and there actually was a highly unrepresentative sample of its possible effect in the sports pages of the Times the other day. Last year, when the tax on the wealthy was, well, too complicated for me to explain, there were five ballplayers with annual wages in excess of $2 million. This year, when the rate is somehow lower, there are 10 in the golden circle. With twice as many making $2 million, their rate could fall in half, and the total taxes paid by those poor chaps would remain about the same. Is this what Mr. Peterson meant?

If so, he didn’t mean much. The five new boys were all making well over a million last year; so it took only raises of a few hundred thousand to double the number of players in the $2 million bracket and thus double the taxes paid by the superstars. This is what is known, among less exalted players, as bracket creep and is mostly due to inflation, which we agreed to rake out of our playing field.

BUT IT DOESN’T really make any difference what reason Peterson gives for the behavior of the wealthy. The fact remains that if they paid more taxes after a 50 per cent rate than they did after a 70 per cent rate, their marginal-rate income had somehow to go up at least 40 per cent. A $200,000 income taxed at 70 per cent had to become at least $280,000 taxed at 50 per cent. And that’s not all. Their pretax income went up at least 40 per cent. But their after-tax income jumped 233 per cent, from $60,000 to $140,000 (and under the new tax law will jump again -to $190,000 or more).

Peterson is a great sleight-of-hand artist. He wants us to keep our eyes on the taxes paid, and not notice the jump in disposable income. This is the way multimillionaires are made. As the tax rate was cut, there came a great leap forward of executive salaries and perks, of lawyers’ fees and doctors’ fees, of tax shelters and arbitrage deals, of interest rates and capital gains. These leaps account for the tax collections Peterson celebrates. There weren’t any million dollar-a-year ballplayers before the cut, and few others with that kind of income. By 1985 (the latest figures in Statistical Abstract of the United States) there were some 17,000 Americans in that fast-growing class. As Phil Rizzuto would say, that’s not too shabby.

On another level, it’s very shabby indeed. For if Peterson is right in his figures even though vague in his reasons, the maxitax cuts gave enormous gifts to the wealthy and nibbled away at the incomes of everyone else. Now, I’m going to throw a lot of figures at you to show you what’s happened in the past 10 years, and I beg you to be careful how you use them. They come from Economic Report of the President, 1988. Some are in 1986 dollars, some in 1977 dollars, and some in current dollars, but within each category the figures are comparable.

First, remember the poor. In 1977 there were 5.3 million families, or 31.7 million people, living in poverty. By 1986, the numbers had risen to 7 million and 34.6 million, respectively.

Next, look at average weekly nonagricultural, nonsupervisory earnings (1977 dollars). In 1977 they were $189.00 and had fallen to $169.28 by 1987. The average annual earnings of the lucky ones who worked a 52-week year were $9,828 and $8,802, respectively. The 1977 figure was slightly above the poverty level, the 1987 figure considerably below it. Of course, those who didn’t work full time didn’t do so well.

Then consider the median family income (1986 dollars). This was marginally up, from $28,966 in 1977 to $29,458 in 1986 (latest figures available). Note that a two-earner family, working full time, wouldn’t come close. Finally, consider the after-tax income of the median families (this is where the wealthy shone like burnished gold). In 1986 dollars it fell, from $25,443 in 1977 to $24,095 in 1986. When you include the increase in Social Security taxes (largely engineered, as aforesaid, by Peterson), the fall was much greater.

In short, from 1977 to 1986, poverty was up a third; weekly earnings were down 10.4 per cent; the median income was up 1.7 percent; but the after-tax income of the median family was down 5.3 per cent. And the after-tax incomes of the wealthy more than doubled. This is what Peterson and his ilk are fighting for. They profess to be very worried about the deficit and are ready even to admit that it grew because of the tax cuts. But they don’t propose to give up those cuts. No, they want us to put all that behind us. They want us to look ahead to a sales tax (which they call a consumption tax), because such a tax falls very little on them but very much on the middle class, especially the lower middle class, and on the poor.

I think these people know very well what they do.

The New Leader

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THE OTHER DAY, in talking about profit maximization and utility maximization, we refrained from referring to their common, everyday name, which is “greed.” Conventional economics says that producers are profit maximizers and consumers are utility maximizers. We let it go at that and examined some of the logical implications of those propositions (” Serving Two Maximizers,” NL, March 7). Today, we’ll look at a few more.

Ivan Boesky was not so picky. He once told the graduating class of a California college that it’s good to be greedy. Most people shrink from such bravado, especially now that Boesky’s stock market activities have forced him to take early retirement. But economists are made of sterner stuff and will, if pressed, admit and even insist that economic agents are greedy. Since everyone is some kind of economic agent-a producer or a consumer or both-they are saying that everyone is greedy. I think that is manifestly untrue.

There are three possible resolutions of the issue. The most popular is to forget all about it. (This is the way ordinary people and ordinary economists handle hard questions.) The second is to claim that, whether or not people really are greedy, they act as if they were. (Even though this is the type of approach favored by Milton Friedman, it gets us nowhere because it raises the same questions of fact: Does Sister Teresa really act as if she were greedy”) The third way is what is known in mathematics and in economics as partial analysis.

Many years ago when I took Latin (it would be an exaggeration to say that I studied it), I was charmed by the grammatical construction with the silly-sounding name of “ablative absolute.” One of the most famous of these is ceteris paribus–other things being equal. The phrase is invoked so frequently by economists that they often drop in its abbreviation ritualistically, as a Tibetan monk spins a prayer wheel. “Cet. par.,” they will say, and go about their business. What they are doing is holding unchanged all except one of the factors of a situation or equation, and then varying that one to see how it affects the outcome or solution.

To laymen it often looks as though economists were simply shadowboxing, because other things generally are not equal; but partial analysis is a perfectly legitimate procedure, and in the majority of economic problems the only procedure. It is used all the time in business, as a means of assigning costs to different parts of an operation, deciding which advertising pitch pulls best, and so on.

On the greed question partial analysis merely tells us that, other things being equal, people want more of whatever it is they want. Moreover, cet. par., people want more money because, cet. par., money is the means of getting whatever people want (even if the best things in life are free). Thus Mother Teresa,

who may be perfectly altruistic and scornful of anything for herself, may, other things being equal be eager for more money to support her charitable causes. She won’t compromise her beliefs to get that money, but cet. par.-that is, putting those beliefs aside-she’ll go for it. And I, holier than thou though I may be, am the same.

None of this is to say that Mother Teresa is greedy, or that I am or that you are. We may sometimes act out of self-interest, just as the most depraved miser may sometimes act altruistically. Other things being equal-all contrary considerations aside-the miser would be happy to be a benefactor of his fellow-men, or some of them.

The same sort of reasoning applies to every honorable or dishonorable activity you can name. Aside from things I will not or cannot do, I’d rather be rich than poor (I hear that rich is better). I’d also like to be an internationally respected philosopher and a better bird watcher, have a better second serve, and (in my less wary moments) be Vice President of the United States. All of these motives are true under the partial analysis rule, and they are no less true than the fact that I am greedy.

Unfortunately, we’ve proved too much. Greed can be established as a universal motive under the partial analysis rule, and only thus, but every sort of motive-including contrary motives -can likewise be established.

It would be a weak and erratic economics that would be based on my second serve; yet one based on greed is in principle no better. Both can show what people do on certain assumptions; the assumptions are valid, cet. par., and so are the showings. It may be contended that some of the assumptions-the second-serve postulate, for example-have trivial consequences. But who knows? It was not until two millennia after Euclid that the implications of the parallel-line postulate began to be understood. Scientists properly insist that knowledge is good in itself, regardless of its apparent usefulness. The partial analysis rule seems to leave us in a world without form, a world where anything goes.

The first thing to notice about any motive is that it implies a value judgment. A motive is not like a physical force, which acts willy-nilly; a motive is diffuse and impotent without a value judgment. Rich is better; benefiting one’s fellow-men is better; a winning second serve is better. The value judgment is certainly personal. I opt for being rich; you may judge otherwise. But it does not stop there. I cannot become rich without enlisting your support or at least your forbearance. Nor can I benefit my fellow-men if they are unwilling (there are even people who don’t read this column). And my second serve is meaningless unless you are across the net lunging desperately as it slices abruptly away. I can’t even improve my golf game unless someone maintains the course[1]. Consequently, a motive including, of course, the economic motive- must be defined in the light of a value judgment that cannot be merely personal but has to be social as well. So we come to ethics and public policy.

Economic questions cannot be posed except in ethical terms. It can be said (other things being equal) that a reduction in the supply of oil will cause an increase in its price. The effects of the increase can similarly be traced throughout the economy; and on the basis of these studies policies can be proposed and analyzed-taxation, subsidization, nationalization, conservation, or perhaps laissez-faire. It may even be assumed that the economic agents involved will act, cet. par., to maximize their gains in the short run. But the choice among policies will not turn on the relative extent of these gains, either individually or in the aggregate. The choice will turn on the national purpose, which is an ethical question and a historical question.

WE AMERICANS have a tendency – often a dominant tendency – to confuse national purpose with short-term profit maximization. Perhaps the frankest statement of that confusion was Calvin Coolidge’s “The business of America is business”; but a fat anthology could be made of similar statements, both earlier and later. It would make dispiriting reading. Happily, a larger anthology could be made of inspired documents that we all, including Coolidge and his admirers, recognize as the symbols of our democracy.

It is further true that there are some questions we will not submit to the market for answers. We will not buy our battle tanks from the Soviet Union, no matter how cost effective they are. We may import golf carts from Poland, but we will not buy howitzers from Czechoslovakia, even though the Skoda works has solid experience and an unexcelled reputation. We will not contract with China to supply us with Silkworm missiles made to our design and specifications, although we could thereby save half or more of the cost.

We are clear-headed enough on that level, but badly confused elsewhere, more confused now than we were a few years ago. We see that the procurement of battle tanks is not, fundamentally, a question of short-term profit maximization. How long before we see that the so-called social issues are not such questions, either? In this connection John Maynard Keynes wrote, “But, chiefly, do not let us overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance. It should be a matter for specialists-like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!”

Professor Frank Hahn of Cambridge replied by referring to the title of Keynes’ book and noting “the singular lack of dentists who have written ‘general theories.”” Every dentist I’ve known face to face has been full of general theories and has told me about them, but Hahn’s point is well taken, as Keynes surely would have agreed. Economics is concerned with more than the price of oil.

Partial analysis can do nothing with the big questions. It is all very well to say that, cet. par., everybody is greedy. But it is very bad to conclude that the encouragement of greed is the proper objective of public policy. The big questions are ethical and historical. Whether full employment, for example, is a proper objective of public policy is an ethical question. What full employment is – should children be counted, should women, should blacks, should braceros, should strikers-is a historical question, and one whose answer has changed mightily since World War II and is still changing. This is the way it is with what we say finally matters.

The New Leader

[1] Those who knew the author are aware that this is the least of the reasons he could not improve his golf game….